The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
11 12 A meeting of the Board of Governors of the Federal Reserve %teal with the members of the Executive Committee of the Federal Ad'140rY Council was held in Washington on Wednesday, June 3, 1942, at Z130 p.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Ransom, Vice Chairman Szymczak McKee Draper Evans Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Thurston, Special Assistant to the Chairman Mr. Thomas, Assistant Director of the Division of Research and Statistics Messrs. Brown, Harrison, Kurtz, Huntington, and Fleming, members of the Executive Committee of the Federal Advisory Council Mr. Lichtenstein, Secretary of the Federal Advisory Council Mr. Brown stated that it was assumed that the bill which was tX Od ced °II June 1, 1942 by Mr. Steagall (H.R. 7158) to amend the ?cetera). ertlore. Reserve Act) was offered at the suggestion of the Board of Gov- He said that, in the opinion of the members of the Executive o ' 4414itt es) section 1 of the bill, which changed the grouping of the 44111a b„ nre of Reserve Banks for the purpose of electing representative mein— the Federal Open Market Committee, was an improvement over the -4.ctirte situation in that it solved the problem of the continuous repre4e4tcti , - of the thc4 since Federal Reserve Bank of New York on the Committee, but €1'°11Ped under the new arrangement Chicago and Cleveland would be t°gether, the difficulties that had been experienced in the 6IM2 -2- IlAet Where only two banks were in a group would not be eliminated by the bill. With respect to the second section of the bill which would 4111end section 19 of the Federal Reserve Act to permit changes in re%vs r, --qiurements for banks in central reserve cities without refertee to reServe requirem ents for banks in reserve cities, Mr. Brown elAted that the suggestion had been made that it would be desirable to Provide in the bill that required reserves for banks in central reeerve eltieS reserve could not be reduced below those required for banks in cities or increased, on the basis of percentage points, to more tha4 50 Per cent above the requirements for banks in reserve cities. In response to an inquiry from Mr. Ranso% as to whether Chicago 811°111d be included with New York as a central reserve city, Mr. Brown the affirmative, stating that the amount of bank deposits held h, sl Chicago banks, the amount of financing done by those banks t -°118111°11t the nation west of the Allegheny mountains, and the amount (4 Cbc)irertintentsecuri ties being taken by the banks were ample justificatliellt(Ir the classification of Chicago as a central reserve city. Ur. Ransom stated that in the interest of flexibility, he e 1)?erer to have New York banks in one classification for the purreserve of requirements and the Chicago banks in another, and tht omnent was followed by a discussion of the reasons why the New c311 be'llk8 170111d not be agreeable to such an arrangement, the principal bei.ng the fear that if these banks stood alone an attempt might be 1114 6/3/42 0 414 at Some future time to penalize New York banks through an unjustified i ncrease in required reserves. Ur. Ransom said that consideration of amendments to the law eOuld not be approached in an atmosphere of distrust of the agencies or "erninent without writing into the law every possible restriction, anci that it was becoming increasingly evident that a situation would ocetir "Ilhich it would be very desirable to change reserve requirements Or banks in central reserve cities without changing them for banks in liesercities or for country banks. Mr. Ransom also questioned the desirability of attempting to eliklge the bill at the present time. He stated that while the Board 4clnot d iscussed the matter, if Mr. Brown would send the Board a memosetting forth the suggestion, it would be given consideration. lAcKee suggested the advisability of deferring the proposed 841elicillietit until after there has been some experience with the law as ttW°1-11c1 changed by the present bill, and Mr. Brown stated that beth 17°1-1-1-d be more likelihood of having the change adopted now as a li%ti°11. on the authority of the Board than there would be of imposing thethe lijnitation after the power was once granted. He also said that if New Ycnqc banks banks desired to follow up the matter, he would be glad to 1111te the a letter regarding it, but that what he was suggesting was that if the Board would agree to such a change, it was 1)lieved the New York banks would support it. the above discussion, Mr. Clayton, Assistant to the 1115 69W42 —4— Chairman, joined the meeting*. Brown stated that the members of the Executive Committee Wel% in agreement with the third section of the proposed bill which would ,. e-lanlinate the requirement of section 19 of the Federal Reserve Act that no bank shall make new loans or pay dividends while its reaerves are deficient. During a further statement by Mr. Brown in which he expressed the °Pon that it was undesirable to group Chicago with one other PedeM1Reserve Bank for the purpose of electing a representative member '3e the Federal Open Market Committee, Mr. Bethea withdrew from the Ur. Brown then said he understood that the suggestion had Zade that another section be added to the proposed bill which ivertaci Imovide for the absorption by the Federal Deposit Insurance C°113°rat'o 1-n of the cost of one examination each year of insured banks, been that th the e Federal Deposit Insurance Corporation and the Comptroller of Currency were favorable to the proposal, but that the Board had Obje ted to its addition to the bill. Mr, D -ansom stated that the matter had been taken up with him by, 'ePrea en tatives of the American Bankers Association, but that it 1144 felt that 4 -Lf this addition were made it would open the bill to c. Ilkher 0 other telt aho changes which had been considered but which it was hated uld not be to included in the bill at this time, that he had sug- the re presentatives of the American Bankers Association 1 ( 042 -5that this amendment be put in a separate bill, and that Mr. McKee had suggested that the amendment be in a form which would require only °Ile examination each year, leaving it to the discretion of the examining authorities whether additional examinations would be desirable illanY Particular case. 141'. Brown said that he understood from the discussion that the 13°arcl was not opposed to an amendment along the lines suggested, biltdid not feel it was advisable to incorporate it in the existing 44. Mr. Brown then referred to recent press statements to the efreet that reserve requirements would be reduced and stated that the kekbers of the executive committee were still of the opinion that there was no Present reason for reducing reserve requirements either generally or in New York, that bankers in New York with whom he had t'llited had stated 50,00t that oIcould get along comfortably on from 00,000 00. l',0 to $2 of excess reserves and that they could r4et the situation with excess reserves of only $100,000,000. He that if the Board felt that it was necessary to reduce reserve l'ecIlltreraents either for the country as a whole or in New York, the ketaber S °f the Executive Committee would be glad to hear a discussion "t the reasons for that position. Ransom stated that the representatives of the Federal Ree8Ystem had 14.4 t maintained the position that every effort should be o reach as many non-bank funds as possible in an effort to avoid 1119 6/3/42 —6— et'eating a situation in which a reduction in reserve requirements 'night be called for, but that if, after such an effort had been made, a Chti), . —"ge in reserve requirements appeared to be desirable the Board OubtedJ would make the change. He said substantial progress had ber., -"rade in the discussions with the Treasury in working out a progrealll and that these discussions would be continued, but that he knew (I nc) r eeling on the part of the Board that action with respect to reeerv e requirements was necessary at this time. He added that perY he would feel much easier about the situation if the amendment -'ing the Board to change reserve requirements in central reC. ltY banks had been adopted so that the Board would have flexle ttuthority to relieve the situation in New York if that should apPe4r t° bs desirable. the °11°wing some further discussion of the possible origin of Pt*ese statements with respect to a reduction in reserve requirelerlte du -ring which it was made clear that the statements were not 114aed 4 arty information given out by the Board's offices, Mr. Harrison l'ePeat ed the °Pinion expressed by him at the meeting of the Council with evell: he Board on May 18, 1942, that a 3/8 per cent rate on bills or higher short-term rate need not affect the rate of 2-1/2 per eellt on. ion tho g-term Government securities. He also felt that there 1141 b theba e --Ine firming of .short rates if necessary in order to give 41" an oPportunity to earn a living and thus protect them as 1118 6/3/42 -.7— Of the essential defense industries in a period of high taxes and substaxitially increased expenses. In connection with Mr. Harrison's statement, Mr. Fleming ex— Pressed the strong opinion that unless legislation were passed it would be essential for the bank supervisory agencies to come to the aid of banks, which were not \relit the depletion of In that connection he %II-1114(A Continue to classed as essential industries, in order to pre— their staffs for war work and military service. added it should be recognized that the banks carry on their essential functions of handling the deposits of the nation if they were to be denied the necessary man— ' P wer to service these deposits. During the discussion of this point, members of the Board pointed ()Ilt that neither of the bank supervisory agencies, nor the Treasury, 111*e classified as essential activities and, therefore, were also faced v'ith a 1088 of personnel. Mr. Or Brown then requested Mr. Kurtz to comment on the operation 1/egUlation vi as 114ed co. the (Irthe changed by amendment No. 4. Mr. Kurtz stated that, experience of his bank with the revised regulation, he was on that there was no adequate reason for the inclusion in the tiegillation of cash loans up to $1,500 except when made for the pur1)(14°I' Purchasing, listed articles. He said the regulation was ex— treraely complicated and that while his bank had undertaken to digest r°1' the info tion of the personnel at the branches, the latter 1119 6/V42 —8- telt that they could not avoid violating the regulation without alien— of their customers. With reference to the provision of Section 8(k) relating to insurance policy loans, he said he did not see how it Wc)111(1 help the economy or aid credit control to put the holder of an illeurance policy in a position where he could borrow from the insurance es3rnIce7 on his policy on any terms but could borrow from a bank on the -ecurity of the policy only on condition that the loan be repaid 1711114.4 twelve months. He added that in the case of collateral loans a 81444 borrower could not liquidate a loan of as much as ,It1,500 in tilelite months without the sale of the underlying collateral. All of these features of the regulation, he said, were inconsequential from the standpoint of credit control but were causing great inconvenience ill ' itation on the part of the sma11 borrower. Ur. Ransom discussed the background of the present objectives v3r Ilegulation VI and why it was believed to be necessary to include in the regulation the present provision with respect to cash instalment 4" the insurance policy loans. He said that ample provision was made in reMation for necessitous or emergency cases and that the Board clIti not see how, in view of the objective of the regulation of substan— 11/414 reducing outstanding consumer debt, it could eliminate cash in— t4.141elit loans as this would make it possible for a person to borrow What Might appear to be a purpose entirely consistent with the 1141' ettort and use other funds already available to him to buy goods 1120 6N42 —9— thereby add to the inflationary pressure on prices. Mr. Brown expressed the opinion that the regulation was not Material]. Y effective in reducing consumer debt and was causing more l'eseatment than the Board realized. Mr. Ransom responded that the 1315srd had received numerous complaints with respect to the regulation, ril"t of which passed over his desk so that he was thoroughly familiar 174h the d ifficulties that were being caused on the part of the small borro wel', and that the regulation was not directed toward measures of 1.1b°r111 or preventinc, the use of credit by spendthrifts but to the reon of all kinds of consumer debt. At this point Chairman Eccles entered the room. tfir. °It' the Flemins referred to the discussion at the last meeting Federal dePi Advisory Council with the Board with respect to the --q* of including in the Treasury financing program a shortnon_ market issue and to the subsequent advice given to the Board that tek, t4 a separate meeting of the Council a position had been taken 1/3°siti ell to such an issue. Mr. Fleming stated that he had not beOh during the discussion of the matter by the Council, that Presnth it would be desirable to give it some further consideration, 44cl that the reas tha he w°uld like to ask for a memorandum from the Board as to °118 for such an issue and an estimate of the amount of funds kieht be raised thereby. At the request of Chairman Eccles, Mr. Thomas outlined the 1121 6/3/42 -10- reasc'ne whY, with a possible 15,000,000,000 available for savings in the fiscal year 1943, as compared with $12,000,000,000 last year, might e 0 possible, by tapping non-bank funds, to reduce the financlhg through the banks to a point as low as $10,000,000,000 during the "seal Year 1943. He said that if that could be done the question of el"ss reserves would be much less important than would otherwise be the case, and that in his opinion the problem was whether the policy adolpted was one of doing everything to tap non-bank funds or continuto t17 to sell securities to the banks in the larger centers on tems whichh appeal primarily to them. He felt that a reduction in reserve requirements at this time might actually lower short-term rates and postiNms the time when it would be possible to attract short-term tilhds into the market, l'°110wing some discussion of the desirability of doing as Itttleh Treasury financing as possible outside the banks, it was stated that accordance with Mr. Fleming's request a memorandum with respect to reasons for a short-term, non-market issue would be sent to all of the Mellibers of the Federal Advisory Council. 1.4115.41g. 111'' Harrison suggested that it might be advisable, instead of rive-year security redeemable on 60 days' notice, to issue ' 14().11th -ertificates and one, two, three, four and five-year notes, Qrcler t alroid reluctance on the part of some corporations to purse 4 f, eYear obligation because of the possible feeling that 122 6/3/42 -11- l'eclataPtion within that period might be unpatriotic. Chairman Eccles' l'esP°rIse was that one of the jobs of the Victory Fund Committees would be t exPlain to investors why that would not be the case. Mr. Brown stated that, so far as he could observe, the resistance Prin'ary contractors to financing war contracts under the provisions Of ''''‘eelltilre Order No. 9112 and the Board's Regulation V, as compared Illtth the methods of advances from the services, was stronger today tha ' ll it was a month ago. Comments were made by Messrs. McKee and Draper to the effect that as the borrowers became familiar with the procedure under Regula(41 1T v they would be more willing* to do financing in that manner. Ch4lriliall Eccles pointed out that it was not anticipated that borrow14 1111cler Regulation V would be preferred by prime contractors but by 111)e°11tirtactors who could not get credit without some form of guarantee. Re 4cicied that none of the services preferred to make advances because they do not have adequateties to supervise them in unlimited 41()iirlt8 and that, while itf : ii realized that they would have to be Nklei thei sfte cases in order to prevent e slowing up of production, '6°11.1.(1 not be made as liberally as in the past. 41 ' . Draper stated that approximately 1.40,000,000 of loans been 80 Made since Regulation V was adopted on April 6, between 75 Per cent of which was to subcontractors, and that a number of 4c1(titi-one) , ' -Loans were in process. 1123 613/42 -12141'. Harrison said that he had just been advised over the tele- Pilolle that a hurried survey had been made of the New York banks with l'eePect to Bill H.R. 7156 to which reference was made earlier in the Rieeting and that on the whole the banks felt that the bill was a good °Ile. The banks definitely favored the first and third sections of the bill, he said, and felt that the flexibility with respect to changes eR -erve requirements as provided in section 2 was desirable, but that liniess a formula could be adopted limiting changes in reserve recIllil'ernents in central reserve cities in relation to requirements in l'eserve cities, it would be better to have the authority vested in the Peciera'l Open Market Committee, not because of any distrust of the preserlt Board of Governors but because of the possibility that in another Per.iod and under different conditions reserves might be increased in IlellYork and Chicago and lowered in the rest of the country for purposes (Aller than monetary control. It was also felt, Mr. Harrison said, that itIllight be difficult to devise such a formula and question had been l'44ed whether it would be possible to include in the bill other amendniellt8 811211 as the exemption of Government deposits from Federal Deposit Itisill'arice Corporation assessment, provision for only one examination a and exemption of Government deposits from reserve requirements. kr. bklt Chairman Eccles stated that all of the amendments referred to Harrison had been considered when the bill was being drafted, that because of their possible controversial character it was 6/3/42 Nt that -13they should not be included in the present bill, the three "i°48 of which related to matters which were not of a controversial cha racter. Thereupon the meeting adjourned. Assistant Secretary. ' , Prove Vice Chairman.
@FedFRASER